A week is a long time in politics, so they say.
Well, seems like, at the moment, seven days is also plenty of time for much to change in the economy as well. 'Volatile conditions' as the market commentators like to describe it.
It is into this volatile mix that the Reserve Bank will soon be stepping again when it next reviews interest rates, on November 24.
There's going to be much to look out for in this review.
For a start it's the full-on review, complete with Monetary Policy Statement. That means we'll have an updated view of how the RBNZ is seeing New Zealand and the world and things economic.
We will also get the RBNZ's latest forecasts of the Official Cash Rate 'track' over the next three years. That's pretty much the first thing the economists will be looking at.
The OCR forward 'track' is an odd thing when you think about it.
This is the RBNZ - which sets the OCR - 'forecasting' what the OCR will be in the months and years ahead.
The facetious might say, well you've told us what it's going to be, you don't need to make any more announcements.
But of course it ain't anything like as simple as that. In reality the OCR forecasts represent the RBNZ's best shot at what might happen in future based on the information it has on hand at the time the forecasts are prepared.
And the RBNZ folk can be as wrong as the next set of economists. For example the Monetary Policy Statement of March 2017 forecast that the OCR would be 2% in March 2020. It was actually 0.25% in March 2020. The RBNZ's forecasters 'missed' that the world was going to be plunged into a pandemic in 2020. In fairness, I think I missed that one too.
But notwithstanding whether the OCR forecasts prove to be accurate, we can be sure that economists will be poring over the detail of the next set in November's Monetary Policy Statement.
After the RBNZ took the axe to the OCR, cutting it to the aforementioned 0.25% in March last year (from 1%), the central bank didn't actually carry any OCR forecast in its MPS statements for over a year, not reintroducing the OCR track till the May 2021 MPS. The reason for this had been the pledge the bank made in March 2020 that the OCR would remain at 0.25% for at least 12 months. It did, having only been increased to 0.5% last month.
What the reintroduction of the OCR track in May of this year showed was how effective the OCR forecasts have become at leading market sentiment. That May OCR forecast was much more 'hawkish' than the 'market' had expected, so it led to a sharp upward revision in market expectations (and pricing for) future interest rate moves.
Mortgage rate rises by the banks have far outstripped moves of the OCR thus far. As mentioned, there's been just the one movement of the OCR, up to 0.5% last month.
In the meantime, with the wholesale interest rate markets having surged strongly upward on the inflationary sentiment, the banks have directly responded to this by pushing mortgage rates higher. And pretty quickly. The average two-year fixed mortgage rate - a popular option - has shot up from around 2.5% mid-year to 4% or thereabouts now.
So, the banks have actually been doing the RBNZ's work for it. They and not the RBNZ are leading the interest rates much higher, albeit that the RBNZ has 'cued' these moves by 'forecasting' aggressive future OCR moves.
The big questions for the RBNZ include the extent to which it keeps with an aggressive 'forward track' OCR forecast - and bearing in mind that bank economists are now seeing an ever higher high point for the OCR, with Westpac economists now picking a 3% peak.
And then beyond the raised eyebrow, wink, wink signalling to markets there's the question of what the RBNZ physically does with the OCR.
Given the very substantial rises already seen in wholesale and mortgage rate markets it might be argued that the RBNZ doesn't need to raise the OCR at the moment. But of course it doesn't quite work like that because the central bank has to at some point back up its future signalling. How strongly it does that just at the moment is the crucial point.
What makes the call for the RBNZ at this particular review so challenging is the fact that this is the last review for the year. It's then just short of three months before the next scheduled review on February 23.
In the some years now since the RBNZ changed its scheduling and introduced a very large summer break for OCR reviews I've been wearing big holes in the scratchy recording saying (largely to myself I think) that the summer break is too long if a particularly dynamic global economic scene is developing.
Well, as said at the beginning of this article, the global economic scene is super dynamic at the moment. And three months is going to be a long time for the RBNZ between OCR drinks.
Does it after all therefore anticipate the way things may go and raise the OCR by 50 basis points, so it has something 'in the bag' to hold matters through the summer?
RBNZ Assistant (soon to be Deputy) Governor Christian Hawkesby recently very deliberately poured cold water on suggestions of 50 basis-point hikes. But this came after Hawkesby himself had earlier commented that had it not been for the Covid Delta outbreak in August the RBNZ could have considered a 50 point move in the OCR.
So would the RBNZ, with such a gap before the next OCR after all consider a 50 point move on November 24?
Or is there a better way?
I like the recent suggestion by ANZ economists of the RBNZ adding a January OCR review.
I think given how volatile the current economic situation is this would be a very good idea and it should be considered.
The other option put forward in that ANZ piece is again for the RBNZ to turn up the temperature on its 'forward track' OCR forecasts.
Could do, I guess, but it still leaves the markets stewing in their own juices over the three summer months.
There's a sense that the RBNZ is already well behind the eight ball with our economy and the way things (particularly inflation) have taken off.
And I'm not sure that everybody clearing off for three months and leaving things under their own steam - bearing in mind the key driving places of the global economy including the US are NOT about to down tools for a summer break - is the way to have our economy heading in the right direction come the early months of next year.
24 Comments
The sooner the RBNZ et al. get back to their core responsibility of issuing and controlling the amount, and not the price, of currency (debt) in The System, the better.
As The Banks are showing us, yet again, it is they that control The System, and not the Central Banks. The commercial banks will pick up on any regulation or initiative that suits them; discard those that don't and raise and lower the cost of debt; interest rates, as it suits them.
Until the commercial banks are reigned back in, don't expect much change to what we see about us today - pandemics and other "unforeseen" events aside. The regular RBNZ musings are to a very great degree worse than guesses, they are irrelevant.
Irrelevant indeed.
"And the RBNZ folk can be as wrong as the next set of economists".
Of course they can. And must inevitably be. Their discipline fails to include the real world in its musings; what could possibly go wrong with that?
This is the relevant read:
https://ourfiniteworld.com/2021/11/10/our-fossil-fuel-energy-predicamen…
Rarely? That's overrating it.....
Economies are notoriously difficult to forecast with any degree of accuracy.
However they aren't wrong for the reasons you suggest. Adding in some kind of energy budget would not have made one scrap of improvement to the accuracy of economic forecasts to this point.
The RBNZ has very little control over how much lending the banks do other than through monetary policy by the use of interest rates which regulates the demand for borrowing and setting the levels of capital the banks must hold and the levels and cost of reserves the banks hold to operate their payment system through the use of selling bonds and QE.
Banks don't create currency, only the government can do that, banks create their own credit or deposit money when they lend as loans create deposits.
The RBNZ has very little control over how much lending the banks do other than through monetary policy by the use of interest rates which regulates the demand for borrowing..
The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.
However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.
Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky. - Link - section II-3
I'm still at a weighted average of just above 2% until the end of next year, lovely now, but a bit hairy when I next have to refix.....
Certainly won't be taking a long rate then as RBNZ again seems to be going well ahead of the curve.
Mind you, only 7 years ago, 5.14 was the lowest mortgage rate I had ever had........
Inflation is over the roof, NZ economy is doing well, public spending is at full throttle & the economy is overheated.
All indicators point to an increased interest rate otherwise we have to wait for nearly 3 months for the next announcement.
But still, Orr can roll dice or flip a coin to take a decision and then give a reason for what he opts for, as he is good at giving crap reasoning to all debacles.
Very likely that the great bond sell-off in the US will coincide with the new year break. Perhaps ironically the party might be over just when greedy speculators will be partying hard. NZ bonds are likely to fall in tandem with the US.
Imo RBNZ shouldn't participate aggressively at the short end. Let the market decide a fair price for credit in an inflationary environment. Of course, this will punish those who took excessive credit risk chasing yields.
Bailing them out this time would be ‘a serious policy mistake’ much bigger than creating excessive money itself because those who don't understand risk in financial markets MUST be weeded out, and those who price risk properly can hold even the central bankers to account.
RBNZ’s job is to tinker at the edges, they should not fix the price of risk – that is the job of the market.
Central banks have a difficult choice. On one hand risk of further damaging the core of the economic system, and on the other hand a short-term financial turmoil.
There are plenty of smart people at the central banks, but none brave enough with the courage to do the right thing, they frequently succumb to the politics, optics, and the pressure from banks.
RBNZ can't improve employment much more when the unemployment rate is 3.4%. They know that and I don't think they're worried about that at the moment.
Their trouble is that they can't move the rates high quickly enough, else the economy will fall on its face and destroy the work done since the advent of Covid. They will go slow, which is the right thing as long as they can walk the talk and normalise OCR in next 4-6 months. The bank rates will lead RBNZ and would likely do the heavy lifting before RB has to
I think we are in for a 0.5% jump next week taking the OCR back to 1%. Expect more rises in February 2022 and the OCR will be 2% by mid 2022. What other options are there ? Nothing else seems to actually work or takes to much time to work or implement with start dates that are 6 months away. There are no other "Levers they can pull" that have an immediate effect.
I agree with everything you’ve said, but at this point I’ve given up guessing what the RBNZ will do. It will not surprise me in the least if the RBNZ choose to ignore rampant inflation, and justify the decision due to their need to target maximum sustainable employment etc
I can’t wait for it to feel like the last chapters of animal farm when Adrian Orr gets up and tells us inflation isn’t really the main responsibility of the RBNZ
How long can the economy be on ventilator. Whenever, now or in future one decide to pull back or raise OCR, markets are bound to throw tantrums. More the delay more likely hood of disaster.
Sometime for long term it is better to leave economy on fundamental. Slight correction now is better for long term than.......for that politicians and RBNZ have to rise above, which they will not for vested biased interest as their thinking is till next election or reappointment.
Because the country is not on a ventilator according to the powers that be, we get feed with the BS positive spin that the economy is booming ! Everything is on the up and up didn't you know ? What do you mean you missed out ? Hell my house probably went up $100 in the time it took to type this. Auckland businesses going down the toilet every day, what could possibly be wrong.
If you'd done it before, you'll know it's easier to take off from the runway than to try landing a plane.
Now without Bascand and Yuong, we'll see how Orr is going to single handedly land his jumbo jet without being part of a TV series.
The real fire in Rome may come true for those who wished it.
It would indeed seem that the next few years could be quite interesting. More exciting than the post war period anyhow.
Military tensions (Taiwan / eastern EU are rising). Lots of sabre rattling by Russia & China. Divisions worldwide with some suggestion of a US civil war further down the path (a not unreasonable suggestion given that empires generally last 250 years ish.)
Add in vax / non vax, maori / non maori, a govt that appropriates things (3 waters / covid testing etc) & it all gets very messy.
Our economy is very divided. Housing & commercial land is booming like never before. But Auckland will be complete in 2023. So what are all those builders going to do?
And 26,500 business failures in the past 8 months has to have a knock on effect sometime.
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